1. Changing the age old methodology of levy of penalty u/s. 271(1) (c) of the Income tax Act, Finance Act 2016 has introduced a new mechanism for penalty in the form of section 270A and 270AA. These provisions shall become applicable for assessments related with A.Y. 2017-18 onwards.

 

2. Now instead of concealment of income or furnishing inaccurate particulars of the income, the charge of penalty shall get attracted when there is under reporting of income and the tax payable on this under reported amount shall be the basis of quantifying the penalty. Further, in the existing provisions of Sec. 271(1) (c), penalty could have ranged from 100% to 300% of the tax evaded. New provisions bring a certainty to the quantum of penalty by prescribing a fixed percentage of penalty that is, 50% in case of under reporting of income and 200% in case under reporting is due to reporting.

 

1. Charge of Penalty

 

Section 270A is providing that “the Assessing Officer or the Commissioner or the Principal Commissioner or Commissioner may, during the course of any proceedings under this Act, direct that any person who has under-reported his income shall be liable to pay a penalty in addition to tax, if any, on the under-reported income.”

 

Following points emerge from above proposition:

 

1. 271(1) (c), there is no explicit requirement of ‘satisfaction” of the authority for direction of levy of penalty.
2. Though the use of word “may” indicate that penalty is not automatic in every case and each case needs to be considered judiciously by the authority before levy of penalty, the way “under reported income” has been considered in the subsequent part of section, it may result into penalty being imposed in every case of addition during assessment etc.

 

2. Under Reporting of Income [Sub Sec. 2 and 4]

 

A simple reading of cases covered in sub sec. 2 conveys the idea that whenever there is an addition during the course of assessment, this shall result into case being treated as a case of under reporting income. As discussed earlier, whether penalty is automatic in every case of addition or concerned authority has a discretion in the matter to be exercised based on a careful consideration of facts of the case- the seeds of litigation have been sown in the section right from its birth.

 

3. Exclusions from Under Reported Income [Sub Sec. 6]

 

After listing out different cases of under reported income as above, Sec. 270A goes on to provide 5 exclusions for the same. These are the cases where income shall NOT be considered as under reported and consequently no penalty shall be livable.

 

            Following are these cases:

 

1. The amount of under-reported income determined on the basis of an estimate,

 

2. In transfer pricing cases, where the amount of under-reported income is represented by any addition made in conformity with the arm’s length price determined by the Transfer Pricing Officer, and the amount of undisclosed income during search cases where penalty is livable under this section.

 

3. As discussed above, the way sub section 2 has been framed, every case of addition during Assessment / reassessment may be treated as a case of under reported income. In the light of this proposition, exclusions discussed above become very important in the sense that if assess is not able to demonstrate that additions made in his case get covered by any of the exclusion cases mentioned above, he runs the risk of suffering the penalty.

 

4. Reporting of Income [Sub Sec. 9]

 

The cases of misreporting have been listed out in sub section 9. Out of total 6 cases designated as misreporting, 3 relate themselves with books of accounts and remaining 3 covers conduct during assessment. Once the case is treated to be of under reporting of income, either under reporting simpliciter or under reporting with misreporting, the next issue is to quantify the penalty. Sub section 3 gives the mechanism of determination of “under reported income” and then sub sec. 10 lays down calculation of “tax payable on under reported income”. The amount of penalty is 50%/200% of this “tax payable”. Interestingly, above methodology is not referring to additions made during the assessment as the unreported income. Instead, it is talking about difference between income assessed presently and income assessed/determined previously.

 

5. Quantification of “Tax Payable”

 

The penalty is 50%/200% of the “tax payable in respect of the under-reported income”. Sub section10 provides that this tax payable shall be calculated as follows:

 

1. Where no return of income has been furnished and the income has been assessed for the first time, the amount of tax calculated on the under-reported income as increased by the maximum amount not chargeable to tax as if it were the total income.

 

2. Where the total income determined u/s. 143(1)(a) or assessed, reassessed or recomputed in a preceding order is a loss, the amount of tax calculated on the underreported income as if it were the total income.

 

6. Conclusion

 

Hon. F.M., when proposing the Finance Act, 2016 has mentioned that the new scheme of penalty is being introduced with the objective of bringing objectivity, certainty and clarity in the penalty provisions. As compared to earlier penalty mechanism, new provisions are certainly at a higher pedestal in achieving the stated objectives. However, as is the case with any new provisions of law, there are a number of unresolved issues which need to be resolved in order to make these provisions workable in a clear and litigation free manner.

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